SINGAPORE (May 2): RHB is downgrading its call on Raffles Medical Group (RMG) to “sell” from “neutral” with an unchanged $1.02 target price.

The move comes on a number of factors including RMG’s recent share price run-up since the group’s release of its 4Q17 results, as well as expectations of potential headwinds such as start-up losses from its China operations.

In a Wednesday report, RHB analyst Juliana Cai sees a “double blow” in the group’s earnings over FY19 as its Chongqing facility would still be in its ramping-up phase while the Shanghai hospital is scheduled to open over the same period.

While the management’s plan to allocate 100 beds in the Chongqing hospital at subsidised prices could help to cover some fixed operational costs, Cai highlights that this strategy currently seems to be delayed due to its difficulty in implementation.

Cai further notes that only 10% of the space in its new Raffles Hospital extension has been committed so far, and maintains the view that the bulk of its rental income would only come in FY19.

Looking ahead, she expects the group’s full-year revenue growth to remain modest at about 5% on-year, as she thinks Singapore is still “structurally challenging for healthcare players” especially given how the SGD remains strong, compared to regional currencies.

“We think Raffles Medical’s valuation is still expensive at this point, given the potential start-up losses from its China hospitals that are to come in 2H18 and FY19,” says Cai.

OCBC analyst Joseph Ng, however, begs to differ.

In his opinion, the start-up losses and consequent lower PATMI levels for FY18-19 forward estimates should have been “well-digested by the street” by now, as this was already guided by RMG’s management for a few quarters.

With the group’s overseas expansion plans on-track and the launch of its China hospitals getting closer within sight, OCBC has maintained its “buy” call on the stock with unchanged assumptions and a fair value estimate of $1.26.

See: Raffles Medical posts 1.7% rise in 1Q earnings to $15.8 mil

“Raffles Medical Group’s (RMG) 1Q18 scorecard was within ours and the street’s expectations. Top-line grew 4.6% y-o-y to $120.2 million, with 6.8% and 4.2% on-year improvement for the group’s Healthcare Services division and Hospital Services division, respectively,” notes Ng on the group’s latest set of earnings results.  

While Maybank analyst John Cheong thinks both of RMG’s upcoming China hospital should reignite earnings growth after the start-up costs in 2018-19 have passed, he thinks these costs would negate higher healthcare and rental income projected for FY18.

Noting a slight recovery in the Singapore market over the latest quarter, he maintains his “hold” call on RMG with an unchanged target price of $1.13.  

As at 12.54am, shares in RMG are trading 1 cent higher at $1.16 or 2.58 times FY19 book according to RHB estimates.